Thursday, February 09, 2006

QQQQ: Reversal Days and Changing Cycles

Thursday's NASDAQ Index (QQQQ) turned in a reversal day, opening near the day's highs and closing near the lows. It was also a relatively wide range day compared to recent action, with a range slightly over 1.8%. We closed about 1.6% off the day's highs and .20% off the lows.

I examined days since March, 2003 (N = 733) to identify past occasions when we've closed off the highs by more than 1.5% and off the lows by less than .30% (N = 66). Three days after these reversal days, the market was up by an average of .50% (38 up, 28 down), stronger than the .22% (416 up, 317 down) for the sample overall.

When I broke the sample in half based on time, however, a pattern emerged. From May, 2004 to the present (N = 33), the average three-day change following a reversal day was .08% (18 up, 15 down). From March, 2003 through April, 2004, the average three-day change was .91% (20 up, 13 down).

Interestingly, returns following the reversal day were superior when the prior day was weak rather than strong. Both of these patterns fail to provide us with favorable near term bullish edges and, indeed, suggest subnormal returns in the short run.

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), and Trading Psychology 2.0 (Wiley, 2015) with an interest in using historical patterns in markets to find a trading edge. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab). I teach brief therapy as Clinical Associate Professor at SUNY Upstate in Syracuse, with a particular emphasis of solution-focused "therapies for the mentally well". Co-editor of The Art and Science of Brief Psychotherapies (American Psychiatric Press, 2012). I don't offer coaching for individual traders, but welcome questions and comments at steenbab at aol dot com.